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The Biggest Social Security Change in 2018 Is Flying Under the Radar

For tens of millions of Americans, Social Security is a financial lifeline that they simply couldn't live without. Data from the Social Security Administration finds that of the more than 42 million retired workers currently receiving a monthly stipend, a third count on their check for at least 90% of their income, with 62% as a whole relying on Social Security for at least half of their income.

For these beneficiaries, no month on the calendar is seemingly more important than October, which is when the SSA releases its inflationary updates to a number of key figures that pertain to both workers and retirees. In 2018, Social Security will certainly look a bit different for most people.

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Social Security changes for retirees and workers in 2018

For retired workers, the disabled, and survivors, a 2% cost-of-living adjustment (COLA) is headed their way. COLA is nothing more than the inflation-adjusted "raise" that beneficiaries receive most years. Though a raise of 2% might sound somewhat pedestrian (and, historically, it is), this will be the largest bump in benefits for Social Security recipients in six years. Refinery and drilling platform shutdowns tied to hurricanes Harvey and Irma, which drove up gasoline prices, are a big reason for this increase.

Of course, not everyone will be eligible for a 2% raise. A majority of seniors who've been protected by the hold harmless clause could see part, or all, of their COLA head to Medicare Part B premiums. Hold harmless is the rule that protects folks who are enrolled in Social Security and Medicare, and who have their Medicare Part B premiums deducted from their monthly Social Security payout, from having their Part B premiums rise at a faster percentage than their Social Security COLA. 

Workers also got some big news with the SSA announcing inflationary increases to the maximum taxable earnings cap.

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Social Security's 12.4% payroll tax on earned income is responsible for generating about 87% of the program's revenue. In 2017, earned income between $0.01 and $127,200 was subject to Social Security's payroll tax. In 2018, the maximum cap has increased $1,500 to $128,700.  Ultimately, depending on whether the well-to-do are employed by someone else or self-employed, this could mean an extra $93 or $186 in taxes owed in 2018.

This under-the-radar Social Security change is arguably the biggest next year

In spite of a laundry list of changes to the program in 2018, it's a nonadvertised change that's perhaps the biggest of all. Namely, the full retirement age (FRA) is rising by another two months to 66 years and four months for newly eligible retirees born in 1956. Your FRA is determined by your birth year, and it's the age at which the SSA deems you eligible to receive 100% of your retirement benefit. 

Back in 1983, a host of amendments were passed that represented the last major overhaul of Social Security. Among those amendments was an increase to the FRA schedule that would gradually increase it from 65 to 67 years over a four-decade span. This increase was designed to take into account lengthening life expectancies. Beginning in 2017 and extending through 2022, the FRA is being increased by two months per year. Thus, newly eligible retirees in 2018 will have to wait an additional two months, until age 66 years and four months, if they want to receive 100% of their retirement benefit.

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What you don't know can cost you valuable retirement income

While a two-month increase in FRA doesn't sound like much on paper, it can certainly compound over time if you're unfamiliar with how your claiming age can impact your monthly payout. For those unaware, unclaimed Social Security benefits grow by approximately 8% a year, beginning at age 62, the point where you're eligible to receive benefits, and stop at age 70. In simple terms, if you sign up for benefits at any point between age 62 and prior to reaching your FRA, you'll accept a permanent reduction in your payout. Conversely, you can receive even more than 100% of your retirement benefit if you wait until after your FRA, or up till age 70, before claiming benefits.

For example, two years ago, a person born in 1954 could enroll at age 66 and receive 100% of their retirement benefit. For someone born in 1956, enrolling at age 66 means only receiving 97.8% of your full retirement benefit. Considering the average worker makes $1,371 a month, this 2.2% decrease means $30 less a month, or around $360 a year. If you live for 20 years after filing your claim at age 66, which is almost par for the course according to data from the SSA, you could be ceding more than $7,000 in lifetime benefits, not including annual COLAs, just for claiming four months earlier than your FRA. That's a big deal.

Long story short, if you were born in 1955 or after, your FRA is on the rise, and for those born in 1960 or later, your FRA will cap at age 67 in 2022. This means you'll have a decision to make: wait longer to receive 100% of your retirement benefit, or claim earlier and accept a steeper permanent payout reduction than in years past. Though that decision isn't always easy, it's an extremely important one, which is why this unadvertised change is probably Social Security's biggest in 2018.

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